Disputes Over Escrow Deposits

What happens to the security deposit if a contract falls through and there’s a dispute over who is entitled to the security deposit?
This can be a sticky situation.

The answer is found in Chapter 27, Section 2715(A), of the Louisiana Real Estate Commission’s Rules and Regulations

According to LREC Rules and Regulations, Ch. 27, Section 2715(A), funds deposited into a sales escrow checking account, rental trust checking account, or security deposit trust checking account shall not be withdrawn for any purposes except:

1. upon the mutual written consent of all parties having an interest in the funds;
2. upon court order;
3. to deposit funds into the registry of the court in a concursus proceeding;
4. to disburse funds upon a reasonable interpretation of the contract that authorizes the broker to hold such funds, provided that the disbursement is not made until 10 days after the broker has notified all parties and licensees in writing;
6. to return the funds

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to a buyer at the time of closing;
7. to cover the payment of service charges on sales escrow checking accounts, rental trust checking accounts, and security deposit trust checking accounts;
8. upon approval by the commission in connection with the sale or acquisition of a licensed entity;
9. to comply with the provisions of R.S. 9:3251 or any other state or federal statute governing the transfer of rents, security deposits or other escrow funds.

The numbers above relevant to our question are numbers 1, 2 and 4.

If the parties cannot agree on how to disburse the deposit check, then the next phrase that needs to be analyzed is “a reasonable interpretation of the contract.” But which broker’s interpretation of the contract is reasonable? What if a Broker feels his/her interpretation is reasonable and they disburse the deposit check only to find themselves in a lawsuit as a result of said disbursement?

Accordingly, it is recommended that legal advice be sought.

For agents: I recommend all agents immediately advise their broker if a contract falls through and a dispute arises over the security deposit.

For brokers: I recommend you have the Agreement to Purchase and Sell reviewed by an attorney to “provide a reasonable interpretation of the contract” and determine who is entitled to the funds. If the attorney determines funds should be disbursed, make sure you notify all parties and all real estate agents of the proposed disbursement and wait 10 days until you make the disbursement.

If the parties do not mutually consent regarding release of the funds and a reasonable interpretation of the contract cannot be made by an attorney, then the security deposit may need to be deposited into the registry of the Court (number 3, above) and a Court Order (number 2, above) may be necessary to release the funds.